Interactive Investor

10 UK large-caps the market loves right now

15th October 2020 09:48

Ben Hobson from Stockopedia


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These stocks have solid financials, robust business models and have a habit of surprising to the upside.

With the FTSE 350 index of Britain’s largest shares trading 20% off its highs recorded in February, it is clear that investors are still jittery on the continuing economic impact of Covid-19. While some areas of the market, like smaller-cap growth stocks, have fared reasonably well through the crisis, the index chart suggests a distinct sense of caution when it comes to large-caps.

But of course, index trends don’t tell the whole story. And when you look closer at the performance at a style level, there are clues that some stocks and certain sectors are recovering admirably from the pullback.

Source: Stockopedia. Past performance is not a guide to future performance.

Take, for example, an investment style that has worked very well in small and mid-cap shares in recent years: Quality & Momentum (Q+M), though shares that can be relatively expensively priced. High exposure to a combination of both quality and momentum is a strategy that tends to pick up the strongest shares in the market. They are the stocks with solid financials, robust business models that have a habit of surprising to the upside. The market loves them, but investors usually have to pay up to own them.

The hallmarks of a High Flyer, high Q+M strategy is that it’ll usually quickly direct you to profitable, popular names. In small-caps it will help you avoid ‘story stocks’ and value traps, while in larger shares it will keep you out of stocks that are unloved, underperforming and possibly in the wilderness.

But the risk of using momentum in any strategy is that it can reverse suddenly when the market gets spooked. Momentum in share prices or profits or forecast upgrades can all unravel quickly if sentiment changes. The quality element of this strategy helps to provide some insulation from that momentum risk, but it’s still an investing approach that needs careful watching.

Another advantage of looking through the Q+M lens is that it can be a pointer to those stocks and sectors that have broken away from general market trends. While the FTSE All-Share index might be 20% lower this year, a look at the performance of large-cap Q+M shares can offer ideas about where more positive action in the market can be found.

Here is a snapshot of UK large-caps with the highest overall exposure to quality and momentum right now. The Value Rank is an assessment of each share’s relative valuation - ranging from 0 (expensive) to 100 (cheap).

Name Mkt Cap £m StockRank Style Value Rank Relative Price Strength 1y ROCE % Sector
Computacenter (LSE:CCC) 2,851 High Flyer 37 129.6 22.8 Technology
Ashtead (LSE:AHT) 13,001 High Flyer 41 61 12.2 Industrials
Spirax-Sarco Engineering (LSE:SPX) 8,413 High Flyer 13 76.7 15.7 Industrials
Rotork (LSE:ROR) 2,575 High Flyer 27 14.8 19.6 Industrials
Croda International (LSE:CRDA) 8,269 High Flyer 17 59.8 17 Basic   Materials
AVEVA (LSE:AVV) 7,332 High Flyer 11 41.9 4.47 Technology
Bunzl (LSE:BNZL) 8,603 High Flyer 45 51.8 14.8 Industrials
Fresnillo (LSE:FRES) 9,782 High Flyer 14 146.9 7.09 Basic   Materials
Hikma Pharmaceuticals (LSE:HIK) 6,177 High Flyer 36 56.3 20 Healthcare
Polymetal International (LSE:POLY) 8,141 High Flyer 42 76.4 28.8 Basic   Materials

It’s only a small sample, but the trend here is that high Q+M large-cap industrials - particularly those in engineering and manufacturing - have been leading the way recently. You can count among them names like Ashtead (LSE:AHT), Spirax-Sarco Engineering (LSE:SPX), Rotork (LSE:ROR), Croda (LSE:CRDA) and Bunzl (LSE:BNZL), together with UK tech-oriented shares like Computacenter (LSE:CCC) and AVEVA (LSE:AVV). The two precious metals mining shares, Fresnillo (LSE:FRES) and Polymetal International (LSE:POLY) are also a nod to the fact that higher quality miners have been increasingly popular this year as gold and silver have risen in price.

Quality and momentum as clue to outperformance

At the extreme, high quality and momentum can lead to relatively expensive valuations in shares. The idea with momentum is that these positive trends have a habit of persisting, meaning that the upward trend (and expensive price) can feasibly continue for considerable time.

The risk of course is that momentum can fade, and when it does the prices of these shares can fall sharply. So this is a strategy that needs careful attention. Paying a higher price for better quality shares on the move is a proven strategy of playing two very powerful drivers of returns in the stock market. In periods of uncertainty, it’s a strategy that may point you to positive trends that don’t show up on an index chart.

Stockopedia helps individual investors beat the stock market by providing stock rankings, screening tools, portfolio analytics and premium editorial. The service takes an evidence-based approach to investing, and uses the principles of factor investing and behavioural finance to help investors make better decisions.

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These investment articles are simply for generating ideas. If you are thinking of investing they should only ever be a starting point for your own in-depth research.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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